Annual Report 2016 - page 151

Annual Report 2016
137
Financial Section
5 Critical Accounting Estimates and Judgements
(continued)
(e) Impairment of interests in associated companies and joint ventures
The Group determines whether interests in joint ventures and associated companies are impaired by regularly review
whether there are any indications of impairment based on value in use calculations. In determining the value in use,
management assesses the present value of estimated future cash flows expected to arise from their businesses.
Estimates and judgements are applied in determining these future cash flows and discount rate. The following
impairment assessments involved estimates and judgements that are more sensitive and any deviation from
estimates may result in the recoverable amount lower than the carrying amount.
Management has carried out impairment assessments in accordance with requirements under HKAS 36 “Impairment
of Assets” on the interests in Tharisa plc (“Tharisa”), a listed associated company of the Group, Hyva Holding B.V.
(“Hyva”), a joint venture of the Group, Newton Resources Ltd (“Newton Resources”), a listed associated company of
the Group and NWS Transport Services Limited (“NWS Transport”), a joint venture of the Group, by using the
discounted cash flow method. The estimated cash flows used in the assessments are based on assumptions, such as
revenue growth, unit price, proved and probable mining reserve, production cost, production capacity, fuel costs and
discount rate, with reference to the business plans and prevailing market conditions. The assumptions used in the
assessments are highly judgemental, and heavily dependent on the discount rate used and the respective sale growth
and price projections. Furthermore, for the impairment assessment of Newton, the management assumed that the
mine will commence its operation in the near future. If the mine cannot commence its operation in the near future, it
will also have significant impact to the impairment assessment. However, management of the Group do not aware of
any information up to date to cast doubt on such assumption. Based on the assessments, impairment losses of
HK$200.0 million and HK$177.6 million were provided against the Group’s interests in Tharisa and Hyva respectively
during the year. No impairment loss was provided against the Group’s interests in Newton Resources and NWS
Transport during the year.
(f) Financial guarantees and tax indemnity
The Group assesses at the end of each reporting period the liabilities under insurance contracts, using current
estimates of future cash flows.
In respect of the financial guarantee contracts provided to property purchasers, the Group considers the net
realisable value of the relevant properties against their outstanding mortgage principal and interest.
In respect of the tax indemnity provided to its non-wholly owned subsidiary, the Group makes estimates on the
project costs for the development of the relevant properties and the potential exposure to the relevant Mainland
China tax liabilities based on an estimation of the future market condition and economic environment. Provision will
only be made in the financial period when the outcome of the potential liabilities can be reliably determined, or
otherwise, the potential exposure attributable to the Group is disclosed as contingent liabilities set out in note 44.
(g) Income taxes
The Group is subject to withholding and income taxes in numerous jurisdictions. Significant judgement is required in
determining the provision for withholding and income taxes. There are many transactions and calculations for which
the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of
these matters is different from the amounts that were initially recorded, such differences will impact the current tax
and deferred tax provisions in the financial period in which such determination is made.
Recognition of deferred tax assets, which principally relate to tax losses, depends on the expectation of future taxable
profit that will be available against which tax losses can be utilised. The outcome of their actual utilisation may be
different.
(h) Estimate of revenue and costs of construction works
The Group recognises its contract revenue according to the percentage of completion of the individual contract of
construction works. The Group reviews and revises the estimates of contract revenue, contract costs, variation orders
and contract claims prepared for each construction contract as the contract progresses. Budgeted construction
income is determined in accordance with the terms set out in the relevant contracts. Budgeted construction costs
which mainly comprise sub-contracting charges and costs of materials are prepared by the management on the basis
of quotations from time to time provided by the major contractors, suppliers or vendors involved and the experience
of the management. In order to keep the budget accurate and up-to-date, the management conducts periodic reviews
on the management budgets by comparing the budgeted amounts to the actual amounts incurred.
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